PS5003ACC: Collins Industries Case Study ( 2024-25) Managerial and Strategic Recommendations
| University | Faculty of Business Environment and Society (BES) |
| Subject | Management Accounting |
Collins Industries Case Study
Overview
Collins Industries is a decentralized organization with five divisions. Among these, the Electrical Division manufactures various electrical items, including the A21 electrical fitting. The division, currently operating at capacity, sells the A21 fitting for $7.50 each, which has a variable manufacturing cost of $4.25.
Scenario Analysis
The Brake Division, operating at 50% capacity, has requested the Electrical Division to supply the A21 fitting at $5 each. The Brake Division plans to use the fitting in a brake unit for a commercial airline manufacturer. The unit cost for producing the brake unit includes:
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- Purchased parts (from outside vendors): $22.50
- Electrical fitting A21: $5.00
- Other variable costs: $14.00
- Fixed overhead and administration: $8.00
- Total cost per brake unit: $49.50
Key Issues
- The Brake Division risks losing the contract if the brake unit price exceeds $50.
- If the Electrical Division maintains the $7.50 price, the Brake Division may suffer losses.
- Collins Industries evaluates performance using ROI and profit measures.
Recommendations
a) Decision for Supplying A21 Fittings
As the manager of the Electrical Division, I recommend against supplying the fittings at $5. This price would not cover the variable costs of $4.25 and would reduce the division’s ROI.
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b) Economic Advantage to the Company
Supplying the fittings at $5 could benefit the company as a whole by securing the Brake Division’s contract. Full computations can illustrate the overall impact.
c) Transfer Price Agreement
Managers can negotiate a transfer price between $4.25 (variable cost) and $7.50 (market price). The optimal range maximizes both divisional and organizational performance.
d) Organizational Behavior Issues
Conflicts between divisional goals and organizational objectives may arise. Clear communication and revised performance metrics are necessary to align interests.
Information Systems Upgrade
The board is considering an integrated system using a single database. This system would enhance real-time data input and support management decisions with financial and non-financial metrics.
External Non-Financial Information
- Customer Satisfaction Surveys: To gauge client perspectives.
- Supplier Performance Metrics: To evaluate timeliness and quality.
- Market Trends Analysis: To anticipate industry shifts.
Collecting this data supports strategic planning and competitive advantage.
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